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3 Keys for Intuitive Surgical's Upcoming Earnings

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Despite strong performance in the second quarter,  Intuitive Surgical  (Nasdaq: ISRG  )  stock slumped back in July, after management hinted that earnings could slow in the third quarter. We're close to finding out if that cautionary outlook was warranted. The robotic surgical systems maker announces third quarter results on Oct. 16.

Will the earlier predictions amount to nothing but a little poor-mouthing, like college football coaches often do? Here are three keys that will make the difference.

1. Europe
Europe presents challenges for Intuitive Surgical. Although the region accounted for the lion's share of the company's growth in prostatectomy procedures in 2011, the number of procedures declined from first quarter to second quarter this year. Intuitive attributed the decline partially to austerity measures being taken by European governments.

Intuitive was caught by surprise to some degree by the extent of the slowdown in Europe last quarter. This time around, management knows that things overseas might not be great.  In July, Calvin Darling, Senior Director of Finance, stated that third quarter revenue could "be near or possibly below" second quarter levels.

Heart valve maker Edwards Lifesciences (NYSE: EW  ) recently missed its third quarter sales forecasts. One major factor cited by management was sluggishness in Europe. If Intuitive Surgical experienced similar problems, its earnings release could be disappointing to investors despite the forewarning. 

2. Expenses
So far in 2012, Intuitive Surgical managed to execute well in keeping costs under control. During the first half of the year, operating expenses rose 20% compared to last year, while revenue grew nearly 27%.

Potentially, the third quarter won't look as good. The company began granting employee stock options in two installments in 2012. The first installment occurred in  February, with the second in August. The company projects the latter grant to add around $14 million to third quarter expenses, compared to the second quarter.

Higher research and development expenses will probably be a factor, also. Because of project timing, Intuitive Surgical expects a "significant uptick" in third quarter R&D costs.

Because company management clearly explained the reasons for these extra expenses three months ago, the impact should already be baked into the stock price. However, if its financial projections were significantly off one way or the other, look for earnings to be affected.

3. Expansion
Intuitive Surgical continues to expand the types of procedures for which its da Vinci robot surgical systems are used. This movement into new uses for the system not only helps boost new sales, but also increases sales of replacement instruments and accessories.

In the first half of 2012, 58% of total revenue came from recurring revenue. That figure tops the 56% in 2011, which, in turn, bested 2010's 53% level.

Intuitive Surgical typically keeps details about its volumes for newer procedures confidential. However, one of its representatives slipped up a few weeks ago by revealing to the Modesto Bee that 4,000 gall bladder surgeries had been performed using da Vince systems so far this year.

The expansion factor could offer the greatest potential for an upside surprise in Intuitive's earnings release. More uses for the da Vinci system mean more value to the health-care providers purchasing the system. More value should translate to more sales -- at least in the long run. The question will be how much impact was felt during the third quarter. 

Intuitive Surgical tends to make success look easy. That's in no small part due to a strong management team led by CEO Gary Guthard, lauded recently by my fellow Fool, Sean Williams. The company consistently outperforms others attempting to leverage robotics in health care. 

The chart for Mako Surgical (Nasdaq: MAKO  ) tells its story in one glance -- down nearly 57% in the last year.  Hansen Medical (Nasdaq: HNSN  ) shares plunged 42% during the same period. 

AccuRay (Nasdaq: ARAY  ) fared much better with the stock soaring by 86% in one year. The company has lost money the last two out of three years, however.

We will soon see how well Intuitive Surgical did in the most recent quarter. Regardless of the results, I like this company, and I like the stock. Over the long run, buying Intuitive Surgical looks like an easy pick. 

Keith Speights has no positions in the stocks mentioned above. The Motley Fool owns shares of Intuitive Surgical and MAKO Surgical. Motley Fool newsletter services recommend Intuitive Surgical and MAKO Surgical . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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